Nevada Hit The Jackpot With The Tesla Gigafactory Deal

Nevada hit the jackpot yesterday in a five-state bid to host Tesla Motors Inc.'s $5 billion battery factory, which could help achieve a mass market for low-emissions electric vehicles by the end of the decade.

Gov. Brian Sandoval (R) offered the automaker $1.25 billion in tax breaks over the next 20 years—more than double Tesla's requested $500 million incentive package—to build what will become the world's largest lithium-ion battery plant at a location outside of Reno.

In return, the so-called Gigafactory is expected to generate $100 billion for Nevada's economy over the next two decades, said Sandoval. It will create 6,500 jobs and add 4 percent to the state's gross domestic product. The governor will seek approval of the deal in a special legislative session next week.

"Is this agreement good for us?" the governor said yesterday at a press conference in Carson City. "I can answer that question today without hesitation and say emphatically this agreement meets the test by far."

Elon Musk, Tesla's intrepid chairman and CEO, said the Gigafactory is important for Tesla's future and for the future of sustainable transport. "Without it, we cannot produce a mass-market car," he said.

The factory, to be built in partnership with Panasonic Corp., is slated for completion in 2017, the same year Tesla plans to debut its $35,000 Model III electric car. The high-performance Tesla Model S electric sedan currently retails for upward of $70,000.

The 15-million-square-foot Gigafactory is designed to produce up to 50 gigawatt-hours of battery capacity each year, enough to reach Tesla's ambitious goal of selling 500,000 electric vehicles (EVs) by 2020.

A supply of lithium and tax goodies helpedThe diamond-shaped facility is also designed to run heavily on renewable energy and eventually have a net zero environmental impact. Former Secretary of State Hillary Clinton said the $5.5 billion that Nevada has invested in clean energy over the last four years was key to clinching the Tesla deal.

"Nevada was competitive because it had already invested in green energy, solar, geothermal and wind," Clinton said yesterday at the National Clean Energy Summit in Las Vegas.

According to U.S. Senate Majority Leader Harry Reid (D-Nev.), the availability of lithium was another draw. Nevada has a ready supply of the element used in EV batteries thanks to a $28.4 million grant from the Recovery Act to Rockwood Lithium in Silver Creek, Nev. In 2009, Tesla received a $465 million loan guarantee from the Department of Energy to build its manufacturing plant in Fremont, Calif., which last year it repaid nine years ahead of schedule.

"This is exactly the kind of public-private partnership that's making clean energy a reality," Reid said in his opening remarks at the National Clean Energy Summit.

But not everyone was enthusiastic.

According to the Reno Gazette-Journal, Tesla's $1.25 billion incentive package includes $725 million in sales tax abatements over 20 years, $332 million in property tax abatements over 10 years and $195 in transferable tax credits that other companies can buy from the automaker. To afford the deal, Nevada had to reduce tax breaks to the film industry and cut them entirely for insurance companies headquartered in the state. Meanwhile, Tesla won't start generating tax revenue for the state until 2024.

While tax cuts are preferable to direct subsidies, which would gamble hundreds of millions of taxpayer dollars on an unproven enterprise, there are still concerns about the size of the deal, said Andy Matthews, president of the Nevada Policy Research Institute, a free-market think tank.

"We certainly love the idea of a low tax burden for businesses, and that's a great way to attract businesses to our state," he said. "At the same time, where you have a particular deal that's so favorable to one particular company, it does raise some issues of fairness."

Other groups have expressed concern that the deal will direct funds away from the education system, which already faces a budget crunch. To address this, Tesla agreed to contribute $35 million to Nevada's schools over a five-year period starting in 2018.

Californians feel lossThe other four states Tesla considered to host the Gigafactory were California, Arizona, New Mexico and Texas. California, where Tesla is headquartered, lost out on the Gigafactory when the state Legislature went into recess over Labor Day weekend without acting on a bill that would have offered Tesla millions in state incentives and expedited the Gigafactory's environmental review.

"It's a clear indictment of our business climate that Nevada is pulling this huge investment away from its natural home," said Calif. state Sen. Ted Gaines (R), who lobbied hard to locate the Gigafactgory in his district. "I'm not sure there could be a stronger signal to legislators about how hard they have made it to operate here."

Tesla's decision is not only an economic loss for California, but also a bad deal for the environment, according to Ethan Elkind, associate director of the climate change and business program at the University of California, Berkeley, School of Law.

"By locating the Gigafactory in Nevada, Tesla is likely to create a much bigger environmental footprint than if they had located in California," he said. "Compared to Nevada, California has better land-use policies, health and safety protections, and easier shipping to the major EV markets."

Meanwhile, some economic analysts have expressed doubts about how successful Tesla will be in its larger environmental mission to displace polluting gasoline-powered vehicles with low-carbon electric cars.

In a recent report, the independent advisory firm Lux Research projected that Tesla will fall well short of its 500,000 EV sales target by 2020. Lux forecasts Tesla sales at 240,000 units by the end of the decade, resulting in tight margins for Panasonic and 57 percent overcapacity at the Gigafactory.

Stockholders are believersBy moving battery production under one roof, Tesla management expects to achieve a 30 percent reduction in battery pack costs and approach the holy grail of a $100-per-kilowatt-hour pack. On this path, Musk expects Tesla to make EVs that are cost-competitive with similar gasoline-powered vehicles by the end of the decade (ClimateWire, Aug. 1).

But Dean Frankel, energy storage analyst at Lux, is skeptical. Tesla is already the lowest-cost battery pack producer, at around $274 per kWh. In his analysis, the Gigafactory could drop the cost to $196 per kWh, but that would reduce the price of an electric vehicle by $2,800.

Battery costs could drop further, Frankel admitted. But that potential depends on information that's currently not publicly available, such as Tesla's ability to secure favorable pricing, cut middlemen out of its supply chains and address concerns about sourcing graphite and cathode material supplies.

"We're not saying they're not going to be successful [in reaching the 500,000-unit mark]. We're just saying they're probably not going to be as successful as they're claiming they are right now on the same timeline," Frankel said.

The battery factory isn't the only factor in achieving scale. Charging infrastructure, government incentives and consumer behavior all have to align.

"Even if Tesla's battery cost targets are achieved, it's not guaranteed that consumers will want to buy electric vehicles in the volumes Tesla is talking about," said John Gartner, a senior analyst at Navigant Research.

The latest sales figures show that plug-in vehicles still make up less than 1 percent of all new vehicle sales in the United States. Still, investor confidence in Tesla continues to grow.

The company's stock shot up earlier this week with an upgrade from investment banking firm Stifel Nicolaus from a "hold" rating to "buy." Analyst James Albertine set a target price for Tesla stock in one year at $400. Tesla's stock closed yesterday just ahead of the official Gigafactory announcement at $286. Overall, the stock is up more than 80 percent so far this year.